South Africa Leaves Interest Rates at 8.25% in Split Vote, Rand Falls

The South African Reserve Bank (SARB) kept its benchmark repo interest rate at 8.25% at its July 2023 meeting as markets had expected. The decision was split three members of the bank’s monetary policy committee voted for the pause, two advocated for a further increase of 0.25 percentage points. “Have interest rates peaked? The answer is a resounding no,” said Kganyago at a press conference. “Is this the end of the hiking cycle? No, it is not. It depends on the data and risks, that is what it boils down to.”

The move triggered selling in the rand to 17.915 against the US dollar, around 0.25% weaker than its previous close. At one point it was down as much as 0.53%.

SARB Board 2022
South African Interest Rates
South Africa Interest Rate

Mamello Matikinca-Ngwenya, chief economist at South African bank FNB, said: “To insulate their ability to reach the 4.5 per cent inflation target in the medium term, the hiking cycle may be resumed. Most likely, interest rates will remain higher for longer.”

South Africa Inflation

  • South African inflation slowed to 5.4 per cent in June, falling below the upper end of a bank target of 3-6 per cent for the first time since April 2022.
  • Excluding food and non-alcoholic beverages, the measure fell below 4.5 per cent.
  • Overall price rises are “forecast to sustainably revert to the midpoint of the target range by the third quarter of 2025,” the bank said.
  • “Serious upside risks to the inflation outlook remain,” it added.

“The job is not done,” said Lesetja Kganyago, central bank governor. “We’re ready to deploy our tools to tackle this monster that’s eating the income of South Africans. We believe we’ve turned the corner [but] there are still risks on the horizon.”

SARB Governor Lesetja Kganyago said during a press briefing.

South Africa Growth

SARB also revised its growth forecasts higher

  • SARB adjusted its 2023 GDP forecast, with the economic growth now expected at 0.4%, a slight increase from the previous estimate of 0.3%.

“South Africa’s economic conditions appear to have improved,” the bank said in its MPC statement/ Longer-term outlook remained uncertain amid ongoing power cuts, logistical bottlenecks and as sustained food price pressures pose a risk to inflation.

The high rates further weigh on household consumption spending those accounts for about two-thirds of South African GDP. Higher interest rates make it more expensive for consumers to borrow as they confront a cost-of-living crisis stoked by high food prices.

South Africa’s Markets Reaction

“Given upside inflation risks, larger domestic and external financing needs, and loadshedding, further currency weakness appears likely,” Kganyago said.

  • The move triggered selling in the rand to 17.915 against the US dollar, around 0.25% weaker than its previous close. At one point it was down as much as 0.53%.
  • The rand is along way off the record low after the last decision where it traded 2.4% weaker, hitting a record low of 19.7640.
  • The yield curve steepened aggressively post the rate hike with fiscal fears of poor growth prospects.

Last meeting the rand weakened after Kganyago said that tighter global financial conditions raise the risk profiles of economies needing foreign capital. Daily electricity rationing and logistics-network constraints, the recent gray listing of the country by the Paris-based Financial Action Task Force and allegations by the US that Pretoria supplied weapons to Russia have all fed into the rand’s steep decline this year. via BBG

Source SARB

From The Traders Community Research Desk